Senate Climate Bill Could Ditch Cap-And-Trade

March 1, 2010

Over the weekend, The Washington Postreported that John Kerry, Lindsey Graham, and Joe Lieberman are preparing to unveil their much-discussed Senate climate bill in the next few weeks. The eye-opening twist, though, is that their bill probably won’t include a single cap-and-trade program for the entire economy. Instead, it would include different types of pollution controls for different sectors. Here’s a rough sketch from Greenwire:

Rather than include all major industrial sources of greenhouse gases in one broad economywide cap-and-trade system, the Senate trio will propose different types of limits for different sectors of the economy, beginning with electric utilities and then turning later to manufacturers such as chemical plants and pulp and paper mills.

"The bottom line with utilities is they'll assume a compliance obligation from day one of the program," the Senate staffer said, adding that no decisions have been made on how to allocate valuable emission allowances to the power companies except to incorporate an industry recommendation to shuttle revenue toward consumers to help pay for higher energy bills.

Transportation fuels can expect a carbon tax that rises based on the compliance costs faced by the other major emitters. Several major oil companies, including Shell Oil Co., ConocoPhillips and BP America, floated the original idea on Capitol Hill, and the Senate trio has evolved their plan by funneling revenue toward transportation projects, reducing fuel consumption and lowering domestic reliance on foreign oil. The Highway Trust Fund is also a potential recipient of the carbon tax revenue, Senate aides said.

Manufacturers would face a series of greenhouse gas limits after power plants, but talks are still ongoing over when the phase-in begins and what specific industries fall into the suite of restrictions.

We’ll have to see how this pans out before comparing it with the House climate bill. In the abstract, it may not be a terrible idea to treat different sectors of the economy differently when it comes to greenhouse gases. For example, a cap-and-trade program could potentially have a very large impact on the electricity sector, but it probably wouldn’t do as much to change our transportation system in the short term. (The House cap-and-trade program, for instance, would only nudge up the price of gasoline by about 13 cents/gallon in the first few years.)

Then again, a piecemeal approach could also get pretty unwieldy. The most elegant and market-friendly way to reduce emissions is, in theory, just to put a simple price on carbon and let businesses adjust for themselves. Originally, this was the preferred conservative approach to reducing pollution—back in the 1980s, Republicans favored cap-and-trade as a more flexible alternative to regulation. But by now the whole concept has become so anathema to the GOP that Kerry, Graham, and Lieberman seem to be straining to find alternatives.